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Urban-Suburban Hospital Disparities Grow in Northern New Jersey

In March 2005, a team of researchers visited northern New Jersey to study
that communitys health system, how it is changing and the effects of those
changes on consumers. The Center for Studying Health System Change (HSC), as
part of the Community Tracking Study, interviewed more than 75 leaders in the
health care market. Northern New Jersey is one of 12 communities tracked by
HSC every two years through site visits. Individual community reports are published
for each round of site visits. The first four site visits to northern New Jersey,
in 1996, 1998, 2000 and 2002, provide trend information against which changes
are tracked. The northern New Jersey market encompasses Essex, Morris, Sussex,
Union and Warren counties.

ospitals and physicians are aggressively expanding capacity to deliver profitable
specialty services in suburban areas of northern New Jersey, fueling concerns about
the cost of care. While expansions are occurring in the suburbs, smaller urban hospitals
surrounding Newark continue to have financial difficulties, leading to the closure
of several facilities. Meanwhile, health plans and employers have identified few
promising strategies to contain costs but continue to experiment with new benefit
and network designs. Other important developments in the market include:

Growing numbers of specialist physicians are terminating contracts with health
plansor threatening to do soin an effort to obtain higher payments.

Employers are increasing employee cost sharing, but most are holding off on
adopting consumer-driven health plan designs.

ospital systems are expanding and
upgrading facilities in suburban
areas of northern New Jersey, while
smaller hospitals serving urban areas
are struggling. The areas two largest
hospital systemsSt. Barnabas Health
Care System and Atlantic Health
Systemare competing aggressively for
market share in the wealthy, suburban
areas of the market where most of the
areas population growth is occurring.
Meanwhile, smaller community hospitals
that serve the aging urban communities
surrounding the city of Newark
confront declining admissions, growing
charity care burdens and deteriorating
financial performance, resulting in
several hospital closures in recent years.
A third group of facilities, comprised of
safety net hospitals that serve inner-city
Newark, remain viable sources of care
for underserved populations, but financial
constraints limit their ability to
upgrade facilities. These developments
raise the prospect of widening disparities
in care among the three groups of
hospitals and the patients they serve.

Suburban Hospitals

Suburban hospitals are expanding profitable
specialty services, such as cardiac
care, cancer care and orthopedics, and
marketing these services as distinct
niche products within their institutions.
St. Barnabas, the states largest hospital
system with five hospitals in northern
New Jersey, reportedly has several hundred
million dollars in planned expansion
projects for its suburban facilities,
including two large emergency
department expansions, new diagnostic
radiology facilities, additional neonatal
intensive care unit and obstetrical beds, and a major cancer center expansion.
Similarly, Atlantic Health System is
developing a new cardiovascular institute
at one of its suburban hospitals
and has completed a neurology center
and cancer center at other facilities.
Several other suburban hospitals are
expanding emergency department
capacity to help compete for market
share, since most inpatients are admitted
through emergency departments.

Improving financial performance
among suburban hospitals has sped
expansion efforts. Hospital systems
have used their considerable negotiating
leverage to secure sizable payment
rate increases from private insurers.
However, hospitals complain that the
actual revenues they receive from
insurers are limited by retrospective
denials of coverage and other methods
used to reduce spending on hospital
care. Other factors that have boosted
suburban hospital finances include
increased admissions because of the
closure of some urban facilities and
modest increases in funding from the
states charity care pool (see next section).

On the other hand, several local
hospitals have experienced significant
reductions in Medicare revenue
because of a 2003 revision to outlier
payments that compensate hospitals
for exceptionally high-cost Medicare
patients. Given the areas long lengths
of stay, this national policy change may
have had more impact in northern
New Jersey than in other parts of the
country and tempered some hospital
expansion activities. But the hospitals
reportedly have been able to partly
recoup the lost revenue by increasing
rates paid by private insurers.

Urban Hospitals

In contrast to their suburban counterparts,
hospitals serving the lowerincome,
urban communities surrounding
Newark and Elizabeth have expering Newark and Elizabeth have experienced
considerable financial hardship,
although the mergers and acquisitions
that occurred during the 1990s have
provided a buffer for some facilities.
Two of these hospitals closed over the
past two years. St. Barnabasa large
suburban hospital systemclosed
West Hudson Hospital just east of the
northern New Jersey market in 2003.
Another urban facility, the Hospital
Center of Orange, was closed in 2004
by Cathedral Healthcare System. The
latter closure was notable because the
hospital had planned to construct
a new facility just before the new
Medicare outlier payment policy radically
changed the hospitals financial
position.

Most observers viewed these closures
as necessary to reduce excess hospital
capacity in aging urban communities
with stagnant or declining populations.
Additional hospital closures are
expected in the near future, including
three facilities near the cities of Newark
and Elizabeth that may be closed or
converted to post-acute care facilities.

Inner-City Safety Net Hospitals

The safety net hospitals serving
inner-city Newark have financial and
institutional protections that so far
have allowed them to avoid the economic
decline experienced by smaller
hospitals in surrounding urban communities.
University Hospital, the
only remaining public hospital in
New Jersey, receives state appropriations
to support its mission of serving
low-income populations. Another
Newark institution, Newark Beth Israel
Medical Center, benefits from its affiliation
with the primarily suburban St.
Barnabas system and from its cardiac
care program and other specialty service
lines that attract insured patients
from beyond the inner-city Newark
area. Similarly, Cathedral Healthcare
operates three hospitals in Newark,
including one with a highly respected cardiac surgery program that generates
revenues to subsidize the systems other
clinical operations. Nevertheless, the
large volume of uninsured and publicly
insured patients served by safety net
hospitals places considerable financial
constraints on their ability to upgrade
facilities and, in at least one hospitals
case, adopt such care innovations as
electronic medical records and quality
improvement programs.

Overall, hospitals in northern New Jersey continue to struggle with gaps in
the quality and efficiency of care they provide in comparison to national norms.
In recent years a series of national studies have documented that patients in
New Jersey hospitals are less likely to receive evidence-based standards of
care such as aspirin upon admission for heart attack patients,1
while these patients are more likely to receive costly services of marginal
clinical benefit.2 Moreover, hospital lengths of stay are
considerably longer in New Jersey than in many otheger in New Jersey than in
many other regions of the country, making it difficult to generate positive
earnings from Medicares inpatient prospective payment system and leaving hospitals
vulnerable to private plans denying payment for longer-than-average hospital
stays. The widening gaps in financial performance between urban and suburban
hospitals suggest that urban facilities will have fewer resources to support
quality and efficiency improvement activities that could enhance their economic
viability.

ew Jersey substantially increased funding for the states charity care pool
in 2004, expanding the pool by 50 percent to a total of $583 million and
also distributing funds more broadly across hospitals to account for the
care non-safety net hospitals provide to the uninsured. Created in 1985, the
pool is used to partially reimburse hospitals for providing uncompensated
care to uninsured patients. The state hospital association lobbied to increase
the size of the pool and change the distribution formula to raise the level
of funding non-safety net hospitals receive. To build their case, community
hospitals improved their ability to document the level of charity care they
provide.

Northern New Jerseys hospitals have benefited to varying degrees from
the growth in charity care pool funds. Newarks University Hospital, the
states only public hospital, continues to receive the largest share of charity
care dollars of any facility in the state, but it did not benefit significantly
from the pool expansion. Suburban hospital systems, including Atlantic and
St. Barnabas, received significant increases in funding, but they continue to
account for a small proportion of total charity care pool dollars.

New Jersey imposed new taxes to help fund the charity care pool
increase, including a tax on ambulatory surgery facilities and an interim tax
on health maintenance organization (HMO) premiums.

New Jersey invested heavily in expanding
care for the uninsured during the
past two years, but a sizeable state
budget deficit raises concerns about the
sustainability of these commitments.
The state has increased funding for the
states charity care pool, which partially
reimburses hospitals for providing
uncompensated care and has expanded funding for community health centers.
However, the state now faces a fiscal
year 2005 budget deficit of approximately
$4 billion. The state has used
a variety of one-time strategies in the
past two years to balance its budget,
including securitizing future tobacco
settlement payments to receive a portion
of the revenue up front, so it now
finds it difficult to identify solutions
that do not involve service reductions
or increased taxes.

The state budget difficulties are
occurring as demand for safety net
services increases. Many safety net hospitals
and health centers in northern
New Jersey reported growth in patient
volume of up to 10 percent over the
last two years, including increases in
the number of uninsured and growth
in immigrant populations and lowincome
patients displaced by recent
hospital closures. Moreover, the freeze
on new adult enrollment in the states
Family Care Medicaid expansion program
has resulted in a steady decline
in public insurance coverage. The
program currently serves only half of
the adults it did before the 2001 freeze,
although the state recently passed a law
to gradually open enrollment to a limited
number of parents.

The safety net in northern New
Jersey historically has struggled with
financial difficulties and limited primary
care capacity. Growing numbers of
low-income patients have sought care
from hospital emergency departments.
Patient volume at University Hospitals
emergency department increased by
approximately one-third between 2002
and 2004, resulting in large increases
in admissions that have caused capacity
pressures throughout the hospital.
The hospitals outpatient primary care
is limited to a single on-campus clinic,
where three-month waits for appointments
are reportedly common. Newark
Beth Israel Medical Center, part of the
St. Barnabas Health Care System, has
experienced a similar growth in emergency
department utilization, along
with an increased proportion of uninsured
patients.

In an effort to expand primary care
capacity, the state has increased financial
support for community health
centers in recent years. This funding
has enabled the development of several
new health centers, along with
expansions at existing centers, with
the total number of health center sites
in New Jersey increasing from 52 sites
two years ago to 80 sites currently.
Additionally, acting Gov. Richard
Codey is expected to sign a bill to
permanently dedicate funds from an
existing assessment on hospital revenue
to grants for health centers across the
state. This funding source has existed
for years, but the funds often have
been used for other health care purposes.
This policy change is expected
to approximately double the amount of
state funding available for community
health centers.

Access to specialty physician care
remains difficult for low-income
people. Private physicians willingness
to treat low-income patients reportedly
has declined over the past two years,
in part because of rising malpractice
insurance premiums and the increasing
number of adults who have lost
coverage from the states Family Care
Program. Newarks University Hospital
offers a full range of specialty clinics,
but appointment wait times can
be long. Private physicians generally
do not receive reimbursement from
the state charity care pool for treating
uninsured patients. However, some
hospitals have begun to pass through
some of their charity care funds to
their affiliated physicians for providing
specialtyespecially surgicalservices
to uninsured patients.

The recent increases in state funding
for hospital charity care and community
health centers should aid safety net
providers in serving low-income people
in northern New Jersey. Nevertheless, observers remain concerned that funding
and safety net services may not
keep pace with the growth in demand
for these services, especially in light of
the state budget shortfall.

Physicians in northern New Jersey
reportedly had been slower than their
counterparts in many other areas of the
country to seek new revenue sources
through the development of specialty
ambulatory facilities and services, but
the recent growth in these activities has
begun to strain physician-hospital relationships.
Ambulatory surgery centers
have emerged across the market and
have begun to divert privately insured
patients from hospital-based facilities.
Additionally, most noninvasive heart
testing has moved to physician offices
and physician-owned facilities in recent
years. Hospital systems have responded
to these developments in different
ways, with some systems partnering
with physicians and others competing
with the physician-owned ventures.

There are other signs of increased
tension between hospitals and physicians.
Increasingly, specialists want to
be paid for taking emergency department
call because of the combination
of uninsured patient volume and
continuing high malpractice liability
insurance premiums. Emergency
department coverage is particularly
difficult for hospitals facing growing
emergency patient visits, ongoing federal
Emergency Medical Treatment and
Labor Act (EMTALA) obligations and
the unique challenges posed by mentally
ill and substance abuse patients.
Some hospitals also reported that physicians
are seeking compensation for
their work on hospitals medical staff
committees.

The problem of medical malpractice
insurance premiums, which reached a
crisis stage with physicians two years
ago, has stabilized to a significant
degree. In 2004, the state established
a premium assistance fund to provide
subsidies for certain specialties to protect
them against liability insurance
premium increases. Physicians continue
to press for substantial tort reforms
to hold down premiums, and some are
pressing to be included in hospital malpractice
self-insurance arrangements
that hospitals provide for employed
physicians. Most hospitals have not
accommodated physician requests for
inclusion, providing another source of
tension between doctors and hospitals.

he contracting environment between
physicians and health plans has grown
increasingly turbulent during the past
two years as physicians pursue strategies
to increase revenue. Increasing
numbers of specialty physicians reportedly
are demanding large payment rate
increases from insurersin some cases
far in excess of Medicare ratesand
then terminating their contracts if
these demands are not met. According
to several health plans, some physicians
are able to maintain or even increase
their revenue by dropping out of health
plan networks because many plans
continue to base payments to out-ofnetwork
providers on a percentage
of the usual, customary and reasonable
(UCR) charges that prevail in the
regionwhich may exceed a plans
established fee schedule for in-network
providers. These relatively generous
payments for out-of-network care have
weakened health plans negotiating
leverage with providers. As a result,
health plans are faced with the prospect
of losing prominent specialty physicians
from their networks and incurring
higher out-of-network costs unless
they acquiesce to specialists payment
demands.

Several health plans have experienced similar difficulties with physician-
owned outpatient surgery, diagnostic
and imaging centers. According
to health plans, these centers often
are developed by in-network physicians
but operated as out-of-network
facilities so their physician owners can
receive higher out-of-network facility
payments. Patients may assume mistakenly
that the facilitieslike their
referring physiciansparticipate in
their plans network, only to learn after
the visit that they are responsible for
significant out-of-network cost sharing.

Health plans recently have initiated
efforts to limit payments to out-of-network
providers to contain costs and
make contract terminations less attractive
to providers. Several of the largest
plansincluding Horizon Blue Cross
Blue Shieldhave instituted caps on
out-of-network payments to hospitals,
ambulatory surgery centers and ancillary
providers over the past year and
expect to introduce similar caps for
out-of-network physician payments.
In most cases, the caps are based on
Medicare rates, potentially allowing
health plans to limit their out-of-network
costs. However, these caps may
expose patients to substantially higher
out-of-pocket costs since patients typically
are required to pay the remainder
of any out-of-network provider charges
not covered by plan payments.

One of the largest insurers in the
market, Horizon Blue Cross Blue
Shield, has considered conversion to
for-profit status in recent yearsa
move that many hospitals and physicians
fear would result in acquisition
by a national health plan that would
pursue more aggressive efforts to constrain
provider payments. State legislation
permitting a for-profit conversion
was passed in 2003, but Horizon eventually
declined to exercise this option
because of concerns about the financial
implications and regulatory requirements
entailed in the conversion.
Some observers speculated that state
officials have renewed their interest in
a Horizon conversion because of possible
conversion proceeds that could be
used to offset the state budget shortfall,
but Horizon officials maintained that
conversion is not under consideration
at this time.

ompared with counterparts in many
other communities, northern New
Jersey employers have been slower to
shift costs to employees through higher
deductibles, copayments and greater
premium contribution shares. A strong
union presence and a relatively robust
labor market have contributed to the
persistence of generous health benefits.
Nevertheless, during the past two
years, employers have taken small but
significant steps to increase patient cost
sharing and introduce other changes
to health plan designs in an effort to
constrain growth in health care spending.
For example, some employers have
changed from fixed copayments of $5
or $10 for office visits or prescription
drugs to coinsurance where patients
pay, for example, 20 percent of the cost
of the service. Other employers have
recently adopted models that require
higher copayments for specialist visits
than for primary care visits. Still other
employers have added in-network
deductibles to their plans for the first
time or introduced lifetime maximum
benefit levels.

Smaller employers increasingly have
switched to health insurance products
with more limited provider networks
in an effort to constrain spending. For
example, Oxford Health Plan, which merged with UnitedHealthcare in 2004,
has experienced significant growth in
demand for its Liberty provider network,
which includes about 10 percent
fewer primary care physicians than its
standard provider network and consequently
offers somewhat lower premiums.
This limited provider network has
become Oxfords most popular network
option. Larger employers so far have
remained reluctant to limit provider
choice through these kinds of product
designs, instead opting to increase
employee cost sharing.

Nevertheless, two national health
plans have recently introduced health
insurance designs with high-performance
provider networks that attempt
to differentiate providers based on
measures of quality and efficiency and
have begun piloting these products
with large, self-insured employers in
northern New Jersey. Aetna launched
a product in early 2005 that uses measures
of quality and efficiency in 12
different specialty areas to identify a
preferred tier of physicians in each
specialty, The product allows employers
to establish differential cost-sharing
levels that encourage patients to seek
care from the high-performing physicians.
UnitedHealthcare introduced a
similar network design, known as its
Premium network, to a limited number
of national employers in northern New
Jersey in late 2004. Some employers
express a willingness to consider such
product designs if they prove effective in
containing health care costs, but so far
few employers have purchased the new
designs.

How will suburban hospital expansions
and new physician-owned
ventures influence health care costs,
quality of care and relationships
between physicians and hospitals?

How will urban hospital closures and
capacity pressures at inner-city safety
net hospitals affect access to care for
low-income people in urban areas?
Will these developments widen the
existing disparities in care for urban
vs. suburban populations?

Will health insurers succeed in discouraging
physicians from dropping
out of plan networks and reining in
the rising costs associated with outof-
network providers? Will health
plans achieve greater negotiating
leverage with providers through the
development of high-performance
networks and/or revised payment
strategies?

How will New Jerseys budget challenges
affect the states newly expanded
investments in hospital charity
care and funding for community
health centers?

The Community Tracking Study, the major effort of the Center
for Studying Health System Change (HSC), tracks changes in the health system
in 60 sites that are representative of the nation. This Community Report series
documents the findings from the fifth round of site visits. Analyses based
on site visit and survey data from the Community Tracking Study are published
by HSC in Issue Briefs, Tracking Reports, Data Bulletins and peer-reviewed
journals.

Community Reports are published by the Center for Studying
Health System Change: